The present invention relates to predicting the future prices of commodities, and more particularly to predicting the future prices of cuts of meat.
Grocers, restaurants and other entities that are purchasers of meat generally buy individual cuts of meat from packers and processors who handle the slaughtering, processing and distribution of the finished product. A foremost concern of meat purchasers is the stability in the price that they pay for a specific cut of meat. It is the practice of some meat purchasers, such as restaurants, to establish a set price for each meal offered on a menu for a period of time. It is undesirable to change the menu price frequently because consumers expect price stability and expect to pay the same amount of money for the same meal. Other meat purchasers such as grocers and some packers and processors also face variable input costs in the price of cuts of meat and prefer to avoid passing volatile input costs onto their customers whenever possible. Meat purchasers have several options in managing their purchases of cuts of meat. A meat purchaser may choose to buy a quantity of a certain cut of meat on a day-to-day basis when their inventory of the cut of meat desired falls below a certain level. This process introduces a significant amount of risk into the purchaser's business because of the day-to-day fluctuation in the price of a cut of meat. This type of risk is referred to as market risk.
Additionally, a purchaser may attempt to predict the future price of a specific cut of meat based on the historical relationship between the specific cut and the price of futures contracts for live cattle. As an example, it is known in the art that, although many factors go into the price of a specific beef product, none is more dominant than the price of cattle. The traditional industry practice in forecasting prices of a cut of meat has been to develop a ratio between the historic cash price of a cut of meat and the relevant live cattle futures value. Once this ratio has been determined, price forecasts are calculated by applying the ratio to the current market price of live cattle futures contracts. This method of modeling has known disadvantages, including for example, an introduction of bias as the model is forced through an unobserved 0 value. Therefore, the forecasts driven by this ratio model will carry biases forward through time as the model predicts future prices of a cut of meat. There is also risk that the predicted prices from the ratio model will not accurately reflect the market price of the selected cut over time. Additionally, meat purchasers generally do not have the expertise necessary to accurately forecast future prices of cuts of meat, as this is not part of their core business.